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Foreign-invested Companies in Korea Sticking to Excessively High Dividend Rate
Dividend Policy
Foreign-invested Companies in Korea Sticking to Excessively High Dividend Rate
  • By matthew
  • February 18, 2013, 10:28
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It has been found that major foreign-invested companies in Korea, including multinational IT companies and global automakers, are having little positive effect on the domestic economy even though they are enjoying record sales these days. Experts are predicting that the size of the dividend they take away from the Korean market will not decrease this year although the headquarters of some leading car importers are moving to conclude supply contracts with Korean auto part manufacturers.

According to the Financial Supervisory Service, the headquarters of foreign-invested companies in Korea are carrying away much more dividends than Korean enterprises do. On average, the former are taking 60% to 90% of their annual net profits, which is quite contrary to Samsung Electronics and Hyundai Motor Company retaining or re-investing at least 60% of their local earnings overseas.

Such dividend policy is posing serious concerns to their subsidiaries and branch offices in Korea as the main offices abroad are continuing with the practice of notifying them of the size of annual profits and dividends unilaterally. “Each local office is notified of how much profits and dividend must be given to the main office when yearly business plans are drafted,” said a financial director of the local subsidiary of a German company, adding, “Most subsidiaries of German corporations have been squeezing themselves to meet the targets.”

For example, Mercedes Benz has recorded a high sales growth rate in Korea, ranking second in the market for years in terms of sales volume, but took a large amount of dividends from it every year between 2007 and 2011. Not a few multinational companies took away dividends from their local subsidiaries during the period regardless of market situations, even when they posted losses.

The dividend to net profit ratio of Mercedes Benz increased rapidly between 2008 and 2010. In 2008, the company recorded a net profit of 5.6 billion won and sent 50% of it to the head office in Germany and Star Auto Holdings, the second-largest shareholder. The percentage went up to over 87% (18 billion won) and 90% (21.2 billion won) in the following years for the largest dividend distribution since the start of its business in Korea. The percentage was lowered to 30% or so in 2011 but still the four-year average dividend rate is approximately 64%, which is 1.8 times higher than the overall average of all foreign-invested enterprises in Korea. “Most German automakers are thinking of the Korean market not as an object of reinvestment but a sort of cash cow, making a sacrifice of local dealers,” said a high-ranking executive of Hyundai Motor Company.

The story is not that different for Japanese carmakers, either. Toyota took 100% of the local market profits, approximately 13.7 billion won, in 2007 and maintained the dividend payout ratio at as high as 50% and 62% in 2008 and 2009 to take out 15 billion won in total. In 2009, the Korean subsidiary of Toyota posted a net loss of 9.7 billion won.

American IT companies like IBM and Intel are following the same trend, too. Since they are not running production facilities here but research institutes, most of the local affiliates’ profits are sent to the main offices, except for labor costs. Intel Korea is a fully-owned subsidiary of Intel. The former paid an interim dividend of 25 billion won out of the net profit of 43.9 billion won in 2009. In 2007, the current net income stood at just 0.33 billion but the dividend rate reached 1,966%.

“Korean firms affiliated with American IT companies are engaged only in sales and thus their parent companies find no reason to make a reinvestment in them,” said an IT security industry insider, continuing, “It is no stretch to say that most of the sales profits of the firms are taken away as dividends by the headquarters.”